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The Brexit Deal: Some Good, Some Bad, Some Ugly

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The United Kingdom (UK), if it still warrants that name, has reached an exit agreement with the European Union (EU), if it still warrants that name. This Brexit settlement lifts a lot of the uncertainty that has dogged all parties involved for years. On that basis alone, it constitutes a positive economic step for those on both sides of the English Channel. It will, of course, hurt the EU to lose its second largest economy. And even with this deal, Britain still has a long and difficult road to travel.

As in any effective negotiation, neither side got all it sought, though the EU seems to have come out better than Britain. London wanted three things from these negotiations: Two were to gain freedom from EU regulatory rules and London’s right to determine its own immigration policy. The third objective was to retain favorable trade arrangements with Europe, which absorbs just about half Britain’s exports. The EU wanted to retain open trade but not at the cost of its regulatory regime, which it earnestly believes helps its residents. Each can walk away claiming that it achieved most of its objectives, but of course the devil is in the details.

The most gratifying part of the agreement (for both sides) is that trade will continue tariff and quota free for goods and some services. This provision alone will mitigate much of the pain of separation. Trade between Britain and the rest of Europe amounts to the equivalent of some $900 billion a year. That suits producers on both sides of the Channel and will allow Britain to keep the many production facilities located there by third parties, prominently Japanese firms, to gain duty-free access to the entire European market. What is more, the agreement allows Britain freedom from EU product and labor rules as well as the environmental regulations with which it had to abide as a member. This provision also benefits both sides. It not only allows London to write its own regulations, but it allows Britain to forge new trade deals with other nations, such as the United States and Japan, without having to insist on EU rules. This concession by the EU also offers Brussels greater flexibility than it previously allowed itself in negotiating trade deals with third parties. The agreement also allows Britain to restrict immigration from EU countries, something Brexit supporters very much wanted, though it will hardly solve the country’s more general immigration problems as they involve migrants from other parts of the world.

Behind these broad measures are caveats that significantly reduce London’s latitude to chart is own course. According to the agreement, the EU has the right to end the tariff-free arrangements if in Brussel’s judgment Britain has begun to use “unfair” trading strategies. Since tax and regulatory policies are all subject to such judgments, London in the end has a lot less freedom to make policy or frame trade deals than it might seem on the surface. That is no doubt a disappointment for London but not nearly as big a disappointment as the fate of British finance. Financial services loom large in Britain’s economy. The deal does not, as London had wanted, give British finance the free access to members of the EU it had when Britain was a member. In anticipation of this disappointment, many British financial firms had already established independent operations on the continent and moved jobs and income accordingly. With this matter now clear, many more will follow. This is an economic hole that it will take Britain a long time to fill.

Arrangements for Ireland probably constitute the biggest setback for London, less in economics than in matters of sovereignty, which, after all, was a big part of the motivation for the exit vote in the first place. The border between the Irish Republic and the UK province of Northern Ireland was a sensitive issue throughout these negotiations. The accords that ended Irish terrorism had stipulated that the border had to remain open to the passage of goods and services as well as people. Before exit, that was not a problem, since both the UK and the Republic were EU members. With exit, however, even under this general agreement, there would be border checks. To avoid that, this agreement makes an Irish exception. The province of Northern Ireland will remain in the EU’s custom area and so avoid any need for border checks, but to make that work, the agreement also insists that Northern Ireland also has to abide by broad EU regulatory standards. Effectively, a part of the UK will lie under the laws of a foreign entity. This constitutes what can only be described as a spectacular loss of sovereignty. It also takes a big step toward Irish unification, something that will delight some and anger others.

The Irish component of the deal was why the opening to this article questioned whether the United Kingdom warranted the name anymore. Northern Ireland’s link to London is, after all, the difference between the Great Britain and the United Kingdom. Such points of pride – or sovereignty – will take a long time to work out. So, too, it will take a long time for Britain to work out the economic and regulatory constraints and questions raised by these arrangements, most particularly the fate of British finance. For the period immediately ahead, however, the settlement will provide an economic boost simply by lifting many of the uncertainties that have hung over economic decision making since the exit vote in 2016. With vaccines coming on line to lift the still more oppressive economic burdens of fighting the pandemic, the combination should allow both Britain and the EU a pronounced near-term boost.

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